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M Wickersham v HMRC

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In M Wickersham v HMRC [2016] EWHC 2956 (30 November 2016), the High Court dismissed a claim for repayment of tax relating to the carry back of losses.

Mr Wickersham was seeking an order that HMRC pay to him £63,000. This was a claim for relief in respect of capital losses incurred in the tax year 2011/12 but carried back to the year 2010/11 under ITA 2007 ss 131 and 132. A standalone or freestanding credit can, at the taxpayer’s election, be redeemed by a payment by HMRC to the taxpayer – or alternatively used to reduce a taxpayer’s liability to tax.

In December 2010, Mr Wickersham had invested £250,000 in a company called Booth Productions. In January 2012, Booth Productions had been placed in voluntary liquidation and the liquidator had indicated that the value of its shares was nil. Under ITA 2007 s 131(3)(d), this was a deemed disposal for the purpose of loss relief.

The court noted that HMRC suspected that Booth Productions had been set up solely for the purpose of a tax scheme; however, HMRC did not assert that Mr Wickersham was seeking improperly to avoid tax. The court therefore set out to determine the case on the basis that Mr Wickersham’s investment had been in the spirit of the legislation.

The taxpayer argued that his claim straddled two tax years; and, therefore, applying Cotter [2013] UKSC 69, his claim was outside a tax return and TMA 1970 Sch 1A applied. He also contended that Sch 1A para 4(1) required HMRC to give effect to the relief claim as soon as practicable unless it opened an enquiry. Since no enquiry had been opened, HMRC must give effect to his claim.

HMRC accepted that the claim came within Sch 1A but considered that the conditions for the claim were not met. First, HMRC contended that the taxpayer had failed to quantify the claim in his return, as he had only set out the actual loss on the deemed disposal. The court observed that the ‘fundamental point’ was that the relief constituted a reduction in taxable income and the taxpayer had indicated the amount by which his income ought to be reduced. Second, HMRC argued that it had given notice of an enquiry, as its letters had indicated its intention to open various enquiries. The court noted that Sch 1A simply required HMRC to give notice of an intention to open an enquiry; and the condition had therefore been satisfied.

The court added that HMRC had in any event established a defence based on prematurity. Applying De Silva [2016] EWCA Civ 40, losses arising in year 2 but which are invoked for relief in respect of year 1 are inchoate until validated by being included in the tax return for the later period. An enquiry into the year 2 loss had been opened under TMA 1970 s 9A, so that it was not final.

Read the decision.

Why it matters: The High Court confirmed that the principles set out in De Silva are not limited to situations involving partners, as the tax treatment of individuals and partners is closely related and any differences are mainly operational.

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